Could venture capital in Pakistan be approaching a turning point?
It is for good reason. Pakistan faces a perception battle; it is seen as too risk-prone and politically unstable. Basic infrastructure is lacking and government policies are not conducive towards investment. The very concept of VC isn’t even completely understood by wealthy Pakistani families and individuals, simply because it has barely existed until recent times.
Rabeel Warraich, CEO and founder of Sarmayacar, said: “One of the things we’ve learned through fundraising is that Pakistan families are not very comfortable with the VC concepts of investing. They’re totally fine giving you the 20, they just don’t want to give you the 2. They can’t understand why I can’t just show them all the deals that I’m sourcing, and then they decide at that point if they want to invest or not. And if they invest, they’ll pay me a small fee.”
Other rudimentary processes are also proving to be a hindrance such as accepting digital signatures.
Warraich explained: “So if someone is sitting in London or Australia, the same piece of paper needs to be sent through courier and get signed by everyone before making its way back to Pakistan. This is such a small thing, but for them (the government) this has the implication of accepting digital signatures across the board. It’s not just a VC consideration, it’s a broader consideration.”
Sarmayacar shared there are currently conversations to start a representative body for the Pakistani venture capital community. This body will weigh the challenges of structuring locally and meeting basic needs in the industry.
Warraich said: “There have been some developments in this space and we are optimistic. Once the government sees that there is potential for things to be set up, money will come in and businesses will be given the opportunity.”
Sarmayacar is led by CEO and founder Warraich and international partner Bernhard Klemen and its team is made up of GIC, Morgan Stanley and JP Morgan alums. According to Warraich, Sarmayacar plans to invest in 15-20 seed to early-stage companies, with 7-8 companies invested by the end of its first year.
The $30-million Pakistan focused fund is also backed by individuals from GIC and other investors. The fund’s current investments are PublishEx, a carrier billing company; ProCheck, a patient engagement services provider; and Patari, an online music portal.
Earlier this month, DEALSTREETASIA exclusively reported that Sarmayacar is investing in Pakistani ride-hailing startup Bykea. The Series A fundraising is expected to be in the region of $5 million and will be a combined investment involving at least three investors.
Edited interview excerpts with Rabeel Warraich, CEO and founder; and Bernhard Klemen, international partner of Sarmayacar:
How many deals do you have now? What will your pipeline look like next year?
Warraich: We have 3 already. There might be another 3 within the next three months, which will make it to 5. So I would expect that by the end of the first year, we should have at least 7 to 8 in our portfolio.
Will you set a cap on the maximum number of companies? As a seed investor, I’m sure you’d like to dedicate sufficient time to everyone.
Warraich: Overall, I think we’re targeting 15 to 20. The reality is that not all 15 to 20 will be existing at one time. Our investment period is five years, and our investment pace is a little bit more gradual, so we think that if we have 10 to 12 companies at any one point that are surviving and doing well then we’re doing well as a fund.
For every entrepreneur that we’ve invested in, we’re on a WhatsApp level. I want to know when something is wrong on WhatsApp rather than wait for something. Hopefully, it will give us time to focus on two things: one is proving new transactions and finding new deals, but at the same time being able to provide time and input to the businesses.
Are there any particular sectors that call out to you? It’s very broad but I’m assuming a lot of them are consumer focused.
Klemen: Yes, I always say that we need to understand and be able to help where it’s needed.
Given the nature of the eco-system, we’re looking more into infrastructure investments. Online payments or carrier billing is another example. It’s not fancy deep tech where you need millions of dollars to develop until you might see a dime of revenues in the future. This is not the part of the eco-system where you should do that at the moment because capital is still short.
How do you find the quality of talent here, given that it’s still a very nascent scene?
Klemen: I think there is a pool of local entrepreneurs that have already done something in the past and have worked in their existing industry for quite a while, so you see that they have some learning. It’s more about giving the ability to scale and to avoid too many mistakes. There is also a group of people that have been trained internationally and have come back. That’s what we like a lot. I think those are the main pools of people that we’re looking into.
Warraich: But I think over here the leadership requires more hand-holding. There isn’t that experience of having built up a venture, sold it, raised multiple amounts of capital etc…I think we will start to see some of that, but it’s very difficult right now to point to an entrepreneur on the street and say “he built that business from scratch, sold it, and is now doing this”.
In terms of the talent, there is potential, but it just needs to be nourished and polished. I think we shouldn’t expect them to be creative because they just haven’t been exposed to it that much.
We see a mix with every startup. In some cases, there are these really enterprising, larger-than-life CEOs that are able to bring people together. In other cases, you have a tech guy who has to work with his entire team just to get them up to speed on certain standards. It’s a combination but it’s not ready talent that can just be absorbed. We’re not there yet.
In terms of LPs, several have expressed interest to invest in your fund but you’re being selective as well. What would the ideal partner look like for you?
Warraich: I think it’s a couple of things. One, they need to be like-minded. There’s a certain approach that we’re taking towards venture investments. We don’t believe in control stakes, or taking too much of the economic incentive away. There are a lot of Pakistani families who don’t know of a deal where they haven’t taken control. Having an LP like that in our investor base is not something that we will ever accept.
But perhaps more important than that, what we want to do is bring experienced risk capital into the country. This is where we’re building on our international bridge connection. We’re looking for institutional lenders that are familiar with risk capital, and have the capacity to absorb losses if they happen, but more importantly, if things don’t work out, they are able to write larger cheques.
Our fund can only invest so much, and we can only take a company so far down the journey. I think the tough bit for us was getting to our first close, which were just high net worth individuals. Now, I think the large institutions are starting to come in play.
Recently the likes of Alibaba and Tencent have now also started reaching out. There are also these larger institutions like the DFIs, who have quite a bit of allocation that they need to put in Pakistan, and previously couldn’t because lack of choice or lack of comfort. Those are the kinds of partners that we want to focus on next.
We also want to reach out to international VCs looking to enter into Pakistan, but didn’t really have a partner of choice. These may be international investors who are looking for Pakistani entrepreneurs who need capital sources to expand internationally.
Klemen: Our partner of choice also means being a trusted partner. That’s how we’re trying to set up Sarmayacar. We’re modelling ourselves on Netherlands’ onshore jurisdiction – very clean structure, very clean standards, robust international governance.
We also try to do this on the LP level. Our investors are predominantly international, so at the moment it’s a lot about trust building because it’s this initial step that you need to make so everything that gives comfort is good.
Can you give us an overview of how the VC/investor landscape is like in Pakistan? The concept of venture capital is still pretty new here.
Warraich: So there are a few different entities. The reality is out of the 50 over investors that attended the Disrupt021 Conference maybe only 5 or 7 will actually invest. Most of them are family-owned extensions or new businesses that are seeding out of their own family.
You have holding company structures, people like Nadeem Hussain who have a personal holding bank where you back some of these companies and try to get funding either at the personal holding vehicle level or company level.
There are guys like 47 Ventures which is similar to us, and i2i Ventures which is also being set up as a Pakistan private limited company for the time being and eventually may set up in the Netherlands as well.
You have impact funds like Insitor, which is from Singapore. There is a double tax treaty between Singapore and Pakistan but it doesn’t provide capital gain exemption which is the main play. So we don’t think that’s very efficient as a set up. It’s probably one of the reasons why Insitor hasn’t yet done a deal in Pakistan.
There are also family offices like Padma Group. Family offices have no definition in Pakistan really. I know they don’t have a fund license locally because the local regulation around fund licenses and fund managers is ridiculous. They treat it the same way as mutual funds, expecting us to take money from retail investors.
What they do is – they have an independent list of trustees, and they want you to set up a trust structure where a bunch of those trustees will ratify which decisions that you make as the investment committee of the fund.
No fund in the world will be able to work like that because I can’t even find 5 people who understand venture capital here, let alone five people from that pre-selected group of trustees. So, it’s quite removed in that sense.
You also have corporate VCs like Lakson and Engro. These are big conglomerates setting up a VC fund because they’re sitting on a ton of cash and don’t know what to do with it. There’s FOMO because they hear about the Zuckerbergs and the Musks around the world, and they want to participate.
What challenges did you face while fundraising?
Warraich: One of the things we learned through fundraising is that Pakistan families are not very comfortable with VC concepts of investing. They’re totally fine giving you the 20, they just don’t want to give you the 2. I’m referring to the 20 and 2 model, where you charge a 2% management fee every year, and a 20% carry. They can’t understand why I can’t just show them all the deals that I’m sourcing, and then they decide at that point if they want to invest or not. And if they invest, they’ll pay me a small fee.
To put in context, the entire management fee of a $30 million fund would be less than my (former) salary in London. I am also putting my own money in. I didn’t ask to raise money before putting my own in, so this is a big call for me. Moving back is a career move, not a two-year thing.
What about Pakistan’s regulatory framework? Do you think the government is paying attention and doing more to attract VCs and foreign investment?
Warraich: When it comes to regulation, there is a recognition that something needs to be done, but there’s a lack of knowledge. It’s also a combination of not wanting to ruffle any (political) feathers while trying to make sense of it in this fast-paced tech environment. The government doesn’t want to get caught out because if something were to go wrong, it can come back and damage the career of someone that would approve something like this. In the political sphere in Pakistan, people will do the “yes sir” bet a lot more than take a stand and say “no, we need to do this to promote more foreign investors coming in.”
If you look at Imran Khan’s speeches, everything has been about bringing in foreign investment, correcting the balance of payments, investing in our youth, getting foreign Pakistanis in the diaspora to send back, invest in the technology sector…etc. All of these things can be done through VC funds, but because it wasn’t done before, there was no one to actually have that conversation with the authorities.
Recently, we were discussing that maybe there needs to be a Venture Capital Association in Pakistan – a representative body that can weigh the difficulties of structuring locally or even basic challenges such as flight connections into the country, visas…etc.
There have been some development in this space and we are optimistic. We hope these areas at the precursor to policy level developments and regulatory updates will follow through. Once the government sees that there is potential for things to be set up, money will come in and businesses will be given the opportunity.
Are there certain processes or adjustments you think the government can quickly make that will significantly help people like you?
Warraich: I can give one example – accepting digital signatures. There is already a law for it.
The problem is if someone is sitting in London or Australia, the same piece of paper needs to be sent through courier and get signed by everyone before making its way back to Pakistan. This is such a small thing, but for them it’s because this has the implication of accepting digital signatures across the board. It’s not just the VC consideration, it’s a broader consideration.
There are also these startup programs with tax exemptions. The odd thing is that according to the local VC framework, if a fund is set-up here, they get tax exemption until the year 2023. But what about 2024?
Why so random?
Warraich: That’s the thing, it’s because they do it on a 5-year basis. So in 2018, they approved a 5-year exemption. I can’t take that sort of tax or regulatory risk when I’m raising a fund because my fund is 10 years and more.
The issue is how do you incentivise an investment. In other parts of the world, you get a tax exemption in exchange for investing in the country. I think Pakistan should give tax breaks and exemptions for money that is invested in venture capital in order to get that money stacked abroad.
There are these things that are currently not ideally set up for the VC industry and could be tweaked. But this is not different from any other nascent ecosystem.
In the 1950-60s, the US didn’t have everything perfect from day one. If everything was perfect, then maybe the opportunity wouldn’t be there. Today, there is certain knowledge arbitrage, which we’re also trying to position ourselves in. That’s what we’re doing for entrepreneurs, bringing that learning from other ecosystems.